Delaware Business Litigation Report

Chancery Finds Payment Condition, Non-Compete, and Non-Solicit Provisions Unenforceable

Ainslie et al. v. Cantor Fitzgerald, L.P., C.A. No. 9436-VCZ (Del. Ch. Jan. 4, 2023)
Under Delaware law, restrictive covenants generally are enforceable unless overly broad in the circumstances, and Delaware courts closely scrutinize them. Similarly, contractual conditions precedent generally are enforceable unless they result in a penalty, and Delaware courts construe ambiguous conditions narrowly to avoid forfeitures. In this decision from the Court of Chancery, a provision in a limited liability partnership agreement intended to discourage competitive activities by former partners was held unenforceable both because it was overly broad and resulted in a forfeiture.

The agreement at issue contained a conditioned payment device by which the partnership made payments to limited partners over four years, subject to not breaching certain restrictive covenants or engaging in competitive activity. Should either condition occur, the partnership could withhold the payments. 

A group of limited partners, against whom the partnership enforced the conditioned payment device, challenged the provisions. The Court found both conditions unenforceable based on the unreasonable underlying restrictive covenants. The first condition was unenforceable because it was triggered by a breach of covenants that were overly broad in geographic scope, prohibited activities, and temporal scope. The second condition was unenforceable because it was an unreasonable forfeiture-for-competition of the limited partners' rights to the payments in the circumstances.

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